On 24th February 2022 the Charities Bill received royal assent becoming the Charities Act 2022. It is coming into force in stages to allow for the necessary guidance to be updated.
Through a series of three articles, we will look at the provisions of the Charities Act which came into force on 31st October 2022 and 14th June 2023 and those coming into force later this year.
A number of significant changes came into force on 31st October 2022.
How the Charities Act changed the way charity appeals work ?
When a charity makes an appeal, it can be extremely difficult to estimate how much money needs to be raised in order to fund a particular project and also how much support to expect for the appeal. This leads to charities often receiving insufficient funds in order to carry out a particular project or, more positively, receiving more money than is needed. Knowing what to do with the money raised under both of these circumstances can be complicated.
Generally any problems can be avoided by drafting appeal literature carefully and making it clear that if the appeal fails due to lack of funds or exceeds its target, the donations received can be used by the charity for other charitable purposes. However this is not always possible and therefore charity trustees need to be aware of the new powers given to them by the Charities Act.
The changes brought in by the Charities Act relax the rules regarding donations given to an appeal which cannot be carried out due to insufficient funds or an appeal which raises too much money. Charity trustees now have the power to apply the money raised for new charitable purposes (subject to certain conditions being met).
Charity Commission consent is required if the value of the fund exceeds £1,000 but if the value of the fund involved is under £1,000 then Charity Commission consent is not required.
If an appeal has failed due to insufficient funds, the new power allows the charity trustees to apply the money raised for charitable purposes similar to those set out in the appeal rather than return the money to the donors if:
- The Charity Commission decides it is unreasonable to incur expense in trying to return the donation, or it is unreasonable for the donors to expect the donation to be returned
- The charity trustees reasonably believe that a donor has given the charity £120 or less in a financial year and the donor has not made a written declaration at the time of donation that the donation must be returned should the appeal fail
- The charity has not been able to find or identify a donor after taking reasonable steps (which are agreed in advance with the Charity Commission) to contact donors to offer the return of their donations
- Donations comprise the proceeds of a cash collection made by collection boxes, lottery, competition or similar method where it is not possible to identify individual donors.
These changes give power to the trustees to determine how best to use the funds raised (with Charity Commission consent if needed) and avoid the need to ask the Charity Commission for a cy-près scheme which was an often complicated device used by the Charity Commission to redirect the funds raised from the purpose of the appeal to a purpose similar to that of the appeal. The Charities Act also removes the right of donors to reclaim their donation within six months of a scheme being issued in the event of a failed appeal due to insufficient funds.
The new rules for amending the governing documents of charities
The Charities Act has provided new rules for amending the governing documents of different types of charity.
Royal charter charities
The Charities Act gives charities established or regulated by royal charter a new statutory power to amend any provision in their charter with the consent of the Privy Council.
This is a welcome change as previously amendments could only be made if the charity had an express power of amendment in its governing document or if the charity petitioned for a supplemental charter which was an expensive and time-consuming process. Often charities only wanted to make minor procedural amendments but were put off by the petitioning process.
It is noted that this power only applies if the governing document of the charity does not contain an express power of amendment, if there is already an express power of amendment then it must be followed.
Helpful guidance is provided by the Charity Commission and the Privy Council on making necessary amendments.
Act of parliament charities
The Charities Act provides a way to enable a statute establishing or regulating a charity to be amended by secondary legislation and confirms that all amendments made this way are subject to a negative procedure in Parliament. This means that the secondary legislation becomes law and remains so as soon as it is signed by the minister unless a motion is raised to reject the legislation within a specific timeframe.
Power to make schemes
As discussed above, a scheme is a document issued by the Charity Commission which changes, extends or replaces the trusts of a charity. In that context, a scheme was used to redirect the purpose of funds raised during an appeal but a scheme can also be used to make more fundamental changes to the trusts of a charity. The Charities Act confirms the power of the Charity Commission to make a scheme in respect of a charitable trust also applies to a charitable company, charitable incorporated organisations (CIOs) or any other charity.
The scheme making powers for royal charter charities or act of parliament charities continue to apply to those charities.
Payment of trustees and the Charities Act
Charity law is built on the principal that charity trustees cannot benefit financially from their role as a charity trustee except in very limited circumstances. Generally charity trustees can only benefit if it is allowed by law or by the charity’s governing document, in each case with or without Charity Commission consent.
Not all governing documents permit charity trustees to be paid for providing goods and services to their charity and therefore the law needs to step in to provide this power. Prior to October 2022, the law permitted charity trustees (or persons connected to them) to receive payment for providing services to their charity but they could only receive payment for providing goods to their charity if they also provided connected services.
The rules creating this rather strange situation have now been amended to allow charities to pay their trustees for providing just goods, just services or both goods and services together.
Happily this power applies in addition to any other power the charity might have to make payments to a charity trustee. This means the power provided by law can be used irrespective of any express provision in a charity’s governing document even if the power in the governing document is more onerous.
Costs incurred by charities in relation to Tribunal proceedings
If charity trustees are faced with a decision by the Charity Commission with which they are not happy, they can challenge the decision by taking legal action in the First-tier Tribunal (General Regulatory Chamber) (Charity). However charity trustees are often concerned about the costs associated with taking legal action.
The Charities Act has introduced a new statutory power for the Tribunal to issue orders authorising the payment of any costs out of charity funds. An order can be made for prospective or current legal proceeding and can cover costs incurred by the charity, the charity trustees or any other person if the charity or its trustees must bear the costs.
The order will cover both the charity’s own legal costs and any other costs the Tribunal might order the charity to pay.
These orders should ideally be applied for before any legal action commences but if a charity has already commenced proceedings, it is still possible to apply for an order.
Trust corporation status and charity trustees
This rather technical amendment automatically confers trust corporation status on any trustee of a charitable trust that is a body corporate and itself a charity. Charities that are body corporates include charitable companies, CIOs, charitable community benefit societies, act of parliament charities and royal charter charities.
This important change means that, if a charitable corporate body is appointed as sole trustee of land or any other property held on charitable trust, it will be a trust corporation for that purpose, which allows it to give valid receipt for the proceeds of sale when disposing of the land and also properly discharge the retiring charity trustees of the charitable trust.
Prior to this amendment, most charitable corporate bodies were not considered to be trust corporations which meant they either could not act as sole trustee of a charitable trust or had to go through the burdensome process of becoming trust corporations.
This amendment will be helpful when dealing with the restructuring of charities. For example, it allows a charitable trust to incorporate and then appoint the new incorporated body as sole trustee of the old trust which can be useful when dealing with permanent endowment or concerns about legacies left in Wills.
Public notice as regards Charity Commission orders
The Charity Commission’s discretionary power to give public notice of the orders it grants has been extended to now include applications for orders. For example, if a charity applies for an order from the Charity Commission to change its objects, the Charity Commission can give public notice of the application in addition to giving notice when the order is granted.
Our next article in the series will cover the changes which came into force as a result of the Act from 14 June 2023. In the meantime, if you have any questions about the points raised in this article, or about any of the changes relating to the Act, please get in touch.